A Palm Desert, Calif.-based financial advisor and his companies were charged with defrauding clients by persuading them to invest a total of more than $3 million with another investor who had earlier been charged by the U.S. Securities and Exchange Commission with running a Ponzi scheme, according the SEC.

Craig Rumbaugh and his companies, Rumbaugh Financial Inc. and Desert Strategic Equity LLC, also deceived the investors about the terms of their investments, and he concealed his intent to profit personally from those investments, the SEC said.

The SEC alleged that Rumbaugh advised clients to invest in promissory notes offered by Susan Werth and her companies, Corporate Mystic LLC and Commercial Exchange Solutions Inc., against whom the SEC filed an emergency action in October 2018 for operating a fraudulent securities scheme.

The SEC's complaint against Werth alleged that her companies raised more than $26 million, promising investors the money would be used to fund short-term, high-interest rate loans in connection with tax-deferred real estate projects, when in fact her companies used those funds to make Ponzi payments to other investors and to pay Werth's numerous personal expenses.

The SEC further alleged that Werth and her companies did not fund any of the promised real estate projects and instead misused investor funds. She also concealed her criminal history and previous lawsuits against her for fraud. Werth was convicted of felony theft and ordered to pay approximately $235,000 in restitution in 2013, the SEC complaint said.

According to the SEC's complaint against Rumbaugh, from August 2015 to June 2016 he persuaded eight clients to invest a total of over $3 million with Werth's companies. Three of those clients lost more than $600,000 in principal when Werth failed to repay them.

The complaint said Rumbaugh and his companies failed to disclose that he was receiving 5% commissions on all of the funds raised from his clients for Werth. In addition, in some instances, Rumbaugh and his companies misled clients about the interest rates Werth's companies would pay on the proposed investments.

Rumbaugh knew that Werth's companies offered 30% interest or more, but he misled the clients because he and his companies intended to keep the additional undisclosed interest paid by Werth’s companies, which was in the 5% to 10% range, the complaint said. When Werth's companies repaid investor funds to Rumbaugh and his companies at the true, higher interest rates, Rumbaugh and his companies repaid clients at the lower rates and secretly kept the difference, the complaint said.

Rumbaugh and Rumbaugh Financial Inc. were charged with violating the antifraud provisions of the Investment Advisers Act and the Securities Exchange Act. Desert Strategic Equity also was charged with violating the antifraud provisions of both laws and with aiding and abetting Rumbaugh's and Rumbaugh Financial Inc.'s violations of the laws.

The SEC is seeking injunctive relief, disgorgement of allegedly ill-gotten gains plus interest, and civil penalties.